Salary FYI

Deferred Compensation

Investing

An arrangement in which a portion of an employee's income is paid out at a later date, typically retirement, allowing the employee to defer taxes on that income.

## Deferred Compensation

Deferred compensation is an arrangement where a portion of pay is set aside for future distribution. Unlike qualified plans (401k), non-qualified deferred compensation (NQDC) plans have no contribution limits but carry additional risk.

### Types

| Type | Tax Treatment | Protection |
|------|---------------|------------|
| Qualified (401k, pension) | Tax-deferred, ERISA-protected | Bankruptcy-protected |
| Non-Qualified (NQDC/457b) | Tax-deferred, subject to 409A | Unsecured employer promise |

### How NQDC Works

1. Employee elects to defer a percentage of salary or bonus before it is earned.
2. Deferred amounts are invested in notional accounts.
3. Distributions occur at a specified date or event (retirement, separation, schedule).
4. Income tax is owed at distribution.

### Risks

- **Credit risk**: NQDC is an unsecured promise. If the employer goes bankrupt, deferred amounts may be lost.
- **409A penalties**: Improper elections or distributions trigger a 20% penalty plus interest.
- **Irrevocable election**: Once made, deferral elections generally cannot be changed.

### Who Uses NQDC?

Executives and high earners who have maxed out 401(k) contributions and want additional tax-deferred savings. Common in financial services, tech, and Fortune 500 companies.